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Foreign direct investment in China fell for the eighth straight month in May, dropping by 17.8pc compared to last year.

In the first five months of the year, foreign investment reached Â£20.8bn, a 20.4pc fall compared to 2008.

The number of new foreign companies setting up in China was 7,890, a 33.8pc drop on 2008, according to the Ministry of Commerce.

Meanwhile, a significant number of foreign companies have dramatically slashed their China operations. "One German company gave its staff one day's notice to leave Shanghai," said one source involved in commerce.

Central and Western China, the riskiest but potentially the most lucrative regions for foreign companies to tackle, suffered the deepest drops in FDI. The coastal cities of Shanghai, Shenzhen and Guangzhou fared better.

Analysts said foreign companies had retreated from China in order to shore up their domestic operations in the face of the financial crisis. However, there is little optimism that FDI will pick up in the near future.

â€œCompanies have just been trying to survive the crisis, I donâ€™t think theyâ€™re in the mood for aggressive overseas expansion,â€ said Wang Qing, chief Asia economist at Morgan Stanley in Hong Kong. â€œItâ€™s too soon to see a pick-up.â€

Businesses with foreign investment account for almost one-third of China's industrial output, 55pc of its trade and 11pc of the jobs in its cities, according to the Commerce ministry.

With foreign firms now cutting back, and an export sector that has contracted for six months in a row, China appears increasingly reliant on government-led spending to keep its economy afloat. The economy grew by 6.1pc in the first quarter, the lowest rate in almost a decade.

Economists at Goldman Sachs believe that government spending accounted for 37pc of all fixed asset investment (FAI), and 51.3pc of FAI growth between December last year and April. "As well as infrastructure, the Chinese government also has an arguably strong influence on investment in agriculture, electricity and gas supply, scientific research, education, health care, environment and so on," said Yu Song, one of the bank's economists.

The Commerce ministry said China would streamline investment procedures from abroad, and Shanghai has now given permission for foreign venture capital and private equity firms to incorporate in China.

A spokesman said the new efforts would help China to remain "one of the best choices for global foreign investment".